Banking and Financial risk is originated due to market movements and market movement will ultimately make the firm to face and host the factors needed to overcome. In simple, those risks normally arise due to instability and losses in the financial market caused by movements in stock prices, currencies, interest rates and more. Let us show widely about the type of risks below.
Table of Contents
Market risk occurs due to the movement in prices of financial instrument. Directional Risk and Non-Directional Risk are the classifications of Market risk.
- Directional risk is caused due to movement in stock price and interest rates.
- Non-Directional risk is said to be unpredictability risks.
Business Risk & Non- Business Risk
Business endeavours will undertake business risk to maximize investor cost and profits such as companies undertake high-cost risks in marketing to launch a new product to gain higher sales. Non- Business risk are not under the control of firms such as risks that arise out of political and economic imbalances can be termed as non-business risk.
Reputational risk is administrated by the Reputational Risk Framework, which was established to provide consistent principles for the identification, assessment and management of reputational risk issues. The reputation of Deutsche Bank which is a leading German bank with strong European roots and a global network which focuses on investment bank and in asset management. Remote events can challenge the trust and negatively impact Deutsche Bank’s reputation and it is most important to protect every employee of the Bank and risk associated with earnings, capital or liquidity arising from any association, action or inaction which could be perceived by stakeholders to be inappropriate, unethical or inconsistent with the Bank’s values and beliefs.
When one fails to fulfil their obligations towards their counterparties credit risk arises and the classifications of credit risk are Sovereign Risk and Settlement Risk. Sovereign risk usually arises due to difficult foreign exchange policies. When one party makes the payment while the other party fails to fulfill the obligations then arise settlement risk.
Liquidity risk happens out of an inability to implement transactions. Two type of liquidity risk are Asset Liquidity Risk and Funding Liquidity Risk. Due to insufficient buyers or insufficient sellers against sell orders and buys orders created Asset liquidity. The risk associated with the impact on a project’s cash flow from higher funding costs or lacks of fund availability create Funding Risk.
It is the risk that happened out of mismanagement or technical failures in operation. Lack of controls creates Fraud risk. Inaccurate model application results in model risk.
When a company have legal limit where they face financial losses out of legal proceedings such as lawsuits is called Legal Risk.
Complex and connected network generated in financial system crop up systemic risk. Hence, the failure of one bank can cause the failure of many other banks as well. This is because banks are counterparties to each other in a lot of transactions.
These are the types of risks involved in banking and financial services which once overcome help us to achieve the profit which we want in stock market.